Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets? | Zendy

Lei Feng | Zendy; Mark S. Seasholes | Zendy

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Do Investor Sophistication and Trading Experience Eliminate Behavioral Biases in Financial Markets?

Author(s) -

Lei Feng,

Mark S. Seasholes

Publication year - 2005

Publication title -

european finance review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 4.933

H-Index - 61

eISSN - 1573-692X

pISSN - 1382-6662

DOI - 10.1007/s10679-005-2262-0

Subject(s) - sophistication , disposition effect , disposition , financial market , economics , business , finance , psychology , social psychology , social science , sociology , paleontology , context (archaeology) , biology

This paper provides an in depth analysis of an investor’s reluctance to realize losses and his propensity to realize gains – a behavior known as the disposition effect. Together, sophistication (static differences across investors) and trading experience (evolving behavior of a single investor) eliminate the reluctance to realize losses. However, an asymmetry exists as sophistication and trading experience reduce the propensity to realize gains by 37% (but fail to eliminate this part of the behavior.) Our research design allows us to follow an individual’s behavior from the start of his investing life/career. This ability makes it possible to track the evolution of the disposition effect as it is reduced and/or disappears. Our results are robust to alternative explanations including feedback trading, calendar effects, and frequency of observation. Copyright Springer 2005

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